Do You Really Know Your Risk Profile?

In a recent post on Reuter's, Felix Salmon states that art is never a sound investment. Specifically, he writes: " I have a rule of thumb for both paintings and houses: would you buy it at this price today if you knew that you could only ever sell it for $1 in the future? If the answer is yes, then go ahead and buy. If it’s no, then think very hard indeed before buying. Houses don’t generally go to zero, of course — not outside Detroit, anyway. But the thought experiment is still worth running, because it helps to crystallize the degree to which you’re implicitly speculating on the housing market when you buy a home."  

A stock or bond investor is implicitly speculating on a company's continuing earnings generating capability which itself rests on a whole host of assumptions. Those assumptions, that the company will continue to be able to attract buyers for its products and services, that it will be able to sell those products and/or services at continually expanding profit margins, that a competitor(s) will not enter the market eroding a significant portion of their market share... I'm sure you get where this is going. If the past eighteen months have demonstrated anything, it's that earnings and cash flow projections are rooted in hope. Salmon states: "But if you’re buying as an investment, in the hope that your property will rise in value, it might be worth taking another look at your risk profile."  Most people simply aren't aware of the true nature of their risk profiles when their portfolios are composed largely of equities and bonds, otherwise, they'd choose to invest elsewhere. Tangible assets perhaps. 

Put Your Assets on the Wall